PracticeConsultingProtecting the role of auditors

Protecting the role of auditors

The Companies Act Amendment Bill, which I will be introducing in the next two weeks, is a very modest measure but consequences are large.

And good for auditing.

The Bill has only two provisions. The first prohibits the sale of other services by audit houses to their audit clients that are large companies, as defined by the Companies Act.

The relation between smaller companies and their providers is of a different order and much less formal and it is in large companies that the problems arise.

This is the tendency for auditors to treat their bids for audit contracts as a kind of loss leader to give them a base from which to sell other services.

This is insider trading and gives the auditor an advantage in selling services over other possible bidders.

It also creates a dependent, and possibly collusive, relationship between two entities who should keep their distance: the auditor and the top management, particularly the chief executive.

If an auditor is using the audit as a foot in the door to sell other services they’re hardly likely to be as tough and as adamantly independent as they need to be. Particularly if they’re not making a lot out of it.

Nor are they going to be quite as thorough if they’ve cut the price to get the business.

The second provision is to rotate auditors on a regular and defined basis.

Once again the aim is to stop the dependent, collusive relationship which may make auditors more compliant than they would otherwise have been.

To limit the auditor’s term in the same way as those of politicians are limited will make audit more expensive. But it will ensure that a second pair of eyes looks at a company’s accounts and assess whether problems have been ignored.

Neither of these ideas is new.

I have been urging them for a long time and one or other of them is already in effect in other audit systems.

We should have both here.

The auditor has a proud and essential role and a major responsibility for efficient and independent invigilation.

Every scandal, every failure to detect abuses or problems, every time the cry of ‘where was the auditor’ goes up, the reputation of auditors and the system is damaged.

Auditors who’re just service sales people, or who have their feet so far under the table that they are effectively asleep on the job, are doing real damage to the reputation of audit and its practitioners.

I’m merely trying to rebuild that.

  • Austin Mitchell is Labour MP for Grimsby

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